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Europe Needs to Cut Greece’s Debt Service Costs, Borg Says

Swedish Finance Minister Anders Borg. Photographer: Chris Ratcliffe/Bloomberg
Swedish Finance Minister Anders Borg. Photographer: Chris Ratcliffe/Bloomberg

The European Union needs to look for ways of reducing Greece’s debt servicing costs, Swedish Finance Minister Anders Borg said, suggesting a shift in focus as the bloc begins considering additional aid for the country.

More than a year after the EU and the International Monetary Fund extended Greece 110 billion euros ($157 billion) in aid, they’re considering options for additional support as the country’s borrowing costs and indebtedness continue to grow.

The yield on two-year Greek notes rose to a euro-era record of more than 30 percent last week. The nation’s debt burden will rise to 158 percent of GDP this year from 143 percent in 2010, according to EU forecasts.

“If the Greeks are now delivering, and if they can stick to that plan and continue to perform in a way that is building credibility, that is shifting the balance of discussion,” Borg said yesterday in an interview in Aix-en-Provence, France.

“They are at a very, very high debt level, so if we are going to see them return to the market, we have to do something about restoring debt service,” he said, adding that reducing interest rates and debt guarantees are among options that need to be considered.

Greek Bonds

European finance ministers gather in Brussels on Monday, July 11, to discuss a possible package, though an agreement probably won’t be reached before early in the European autumn, Borg said. Any effort to draw support for Greece from banks, insurers and other investors should also be judged on how it improves debt sustainability, he said.

Financial firms are discussing a proposal from French banks to roll over 70 percent of bonds maturing by mid-2014 into new 30-year Greek debt backed by AAA-rated collateral. EU leaders want creditors to voluntarily roll over about 30 billion euros of Greek bonds to support loans by the bloc and the IMF.

Standard & Poor’s said last week that the French plan would be considered a “selective default,” prompting Germany to revive a proposal to simply lengthen the maturity of Greek debt.

“It’s not clear that the French plan meets the idea of reducing debt service costs on the Greek economy,” Borg said. Whatever happens, Greece “cannot go to a default situation” and there must be “no credit event,” he said.

Italian Tensions

Europe is trying to draw a line under a debt crisis that Greece sparked more than a year ago and that threatens the 12-year-old monetary union. Ireland and Portugal sought emergency aid totaling 146 billion euros after the initial bailout of Greece in May 2010 and investors remain concerned about some bigger euro nations including Spain and Italy.

The yield on 10-year Italian bonds rose to a nine-year high July 8 on concern tensions between Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti may derail government plans to reduce the budget deficit. Tremonti said July 8 that he moved out of a Rome apartment provided by Marco Milanese, a former aide and member of parliament, whose arrest is sought by prosecutors in Naples. He had a “long and cordial working lunch” with Berlusconi, the leader’s office said.

Italy is the euro area’s biggest bond market, with 1.8 trillion euros of outstanding debt as of Dec. 31, compared with 1.1 trillion euros of German debt outstanding on March 31, according to the nations’ debt agencies.

“Italy has had very high sustainability of debt thanks to its domestic financing,” Borg said. “The political situation is obviously introducing some uncertainty.”

Borg also said that the turmoil in Europe isn’t likely to end any time soon and that governments need time. “I don’t think that we can expect it to go away in the next few weeks or months,” he said.

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